Your PI cover may not be enough
South Africa’s risk and financial advisers must pay close attention to the terms and conditions contained in their professional indemnity (PI) insurance covers and realise that these policies are unlikely to perform for all possible scenarios. Steve von Roretz, Director at Leppard Underwriting, kicked off his presentation to the Financial Intermediaries of Southern Africa (FIA) 2022 Advice Summit by observing that intermediaries were increasingly blamed for everything that went wrong in the insurance value chain. Hence the title of his talk: ‘Financial services providers (FSPs) at risk’.
Identify and understand the risks you face
Financial and risk advice practices were encouraged to identify and understand the risks facing their businesses and realise that they could not afford to be held responsible for everything that might go wrong. “Your PI cover does not always perform for you when things go awry,” said Von Roretz, adding that neither the pandemic, nor the court’s decision on insurer liability for business interruption (BI) claims following the pandemic and lockdown could have been predicted. It is increasingly clear that the consequences of systemic risk events have not been properly factored into the insurance risk landscape, as evidenced by BI losses post-pandemic; the rising frequency and severity of extreme weather events; and the staggering losses following social upheaval.
According to Von Roretz, the reinsurance industry had toyed with the possibility of pandemic and surging natural catastrophe losses in the years running up to 2020-21. An anecdotal example is that around November 2019, the risk officer at a large reinsurer spent some time modelling what would happen following a countrywide shutdown due to pandemic and raised the alarms over the business’ balance sheet strength. Such concerns were dismissed out of hand, and the systemic risk event in question dismissed as ‘unlikely to happen’. Concerns over the risk of multi-billion-dollar natural catastrophe loss events were also shrugged off due to reinsurers ‘having their aggregations under control’.
The point of these anecdotal reinsurer responses to systemic risks is that unanticipated loss events can, and do, occur, as evidenced by the 2020-21 COVID-19 pandemic; the July 2021 rioting and looting in areas of Gauteng and KwaZulu-Natal; and Hurricane Ian, which tore into the Florida coastline in the United States this year.
Your customer must take some responsibility
Intermediaries in the non-life insurance broking segment are at particular risk due to the complexity of operational risk exposures that their commercial clients face. “You must make sure that you ‘park’ responsibility where it should rest, with the client, [by] entering into professional service level agreements with them,” said Von Roretz. He advocated for risk advisers to adopt a similar approach to that taken by investment managers: “If you approach an investment manager to invest money on your behalf, they take you through a lengthy advice process; collect an enormous amount of data; and, by the way, limit their liability”. The key advice imparted here was that risk advisers must spend the time needed to understand their client’s risk profile and risk rate the client in terms of the risk presented to the advice practice.
It is also non-negotiable for the advice practice to confirm what it will and will not do, and what it will be responsible for. The bottom line is that intermediaries are not being paid enough to be a guarantee for anything that may go wrong at the client. As for purchasing PI cover… “We buy PI cover expecting the worst, and our only guidance [on how much to buy] comes from the regulator, who refers to a minimum level of ZAR1 million; but they have no idea of what the right number is,” said Von Roretz. Nowadays, the adequate level of cover is nearer ZAR5 million or around 40% of a brokerage’s annual throughput in terms of revenue. Whatever your number, it should be adjusted for the complexity of your clients’ businesses.
Looming operational and regulatory challenges
Other presenters to the FIA Advice Summit referred to the complex risk environment that intermediaries, insurers and underwriting management agencies (UMAs) face. One of the major challenges occurs at policy renewal, where brokers and risk managers face significant changes in the level and type of cover that insurers, in response to tougher reinsurance conditions, are able to offer. Another challenge stems from the evolving regulatory environment, with all FSPs preparing for the growing compliance burden that the Omni Conduct of Business Report (Omni CBR) and pending Conduct of Financial Institutions (COFI) Bill will impose. “The regulatory change that is coming is significant; how many of you have considered the impact of COFI and the Omni CBR on your practices over the next two or three years?” asked Von Roretz.
Binder and outsource agreements were raised as an ongoing issue for non-life insurance brokers and UMAs, and attendees were encouraged to view these agreements in the context of the duty of care they imposed. The difficulty, according to Von Roretz, was to figure out where liability arose between signatories of such arrangements. “Does a broker breach its authority in terms of the amount of cover it puts the insurer on risk for?” he asked. Probably not, because insurers would usually have capacity beyond that number. To answer this type of question requires considering the rationale for the insurer entering the contract with the broker in the first place, being to retain the broker’s services to secure quality business for the insurer.
Limit your liability; understand your client’s needs
It is important for each stakeholder in the financial services sector to understand their respective roles. Financial and risk advisers are predominantly client facing but must also establish and maintain viable relationships with product providers in the guise of insurers and / or UMAs. It is the soundness of these relationships that becomes an integral component for sustainable underwriting. “I conclude with the point that I made right from the start of this presentation: limit your liability and understand your client’s needs and risks,” Von Roretz said. And more importantly: “Do not underwrite business or risks that you do not understand, and especially never for revenue; if you want to get involved with a customer that has more complexity than your experience allows, rather engage with and partner with others”.
Writer’s thoughts:
The ‘FSPs at Risk’ presentation to the FIA 2022 Advice Summit raised some interesting points about how stakeholders in the South African non-life insurance industry are adapting to the evolving risk landscape. It also contained an important warning to financial and risk advisers not to overestimate the cover on offer from their professional indemnity (PI) covers. Are you 100% confident that you know what your PI policy will and will not cover you for? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
Comments
As an industry we need to fight this kind of umbrella legislation as we are funding the eradication of all but the largest institutions.
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